Stock Day Traders Are Unleashing Most Bullish Bets in Nine Years

(Bloomberg) -- Exuberance in American stocks is spurring speculators to unleash bullish bets in the options market at a rate unseen in almost a decade.

Trading in contracts that wager on single names to increase in value has surged to the highest since 2011, with a whopping 2.3 million calls changing hands on Thursday, according to Cboe data.

The bullish action is reminiscent of the explosion of retail interest on online forums on the eve of the coronavirus crisis in sleepy companies like Virgin Galactic Holdings Inc. and Plug Power Inc.

This time around, the beneficiaries are concentrated in tech and cloud computing, as well as in single names rocked by the pandemic such as United Airlines Holdings Inc., according to Chris Murphy, co-head of derivatives strategy at Susquehanna.

“We are seeing a lot of bullish options speculators, and I think the ‘message board flow' is playing a part,” he said, referring to retail speculation typified on the Reddit forum r/wallstreetbets.

Even after the S&P 500's 40% surge in little more than two months, demand for single-stock hedges is muted, with the number of put options traded for every call slumping to the lowest in six years.

The strategist highlighted outsize trading in contracts on United Airlines in a note on Thursday. Over 200,000 calls changed hands on June 3, the most in over a decade, according to Murphy. The stock has jumped around 30% in the past two days on plans to boost flights.

Retail traders helped spur wild swings in single-name stocks earlier this year, bidding up call options in an attempt to raise prices of the underlying companies. Now a similar frenzy of bullish demand has broken out thanks to business re-openings and policy stimulus.

But the signal from the derivatives market is also ringing alarm bells in the midst of a the sweeping economic downturn.

“A high level of equity call volume as we are seeing now becomes a warning sign to me that optimism may have become excessive,” said Mike Shell, founder of Shell Capital Management LLC.

‘Irrationally Exuberant'

Speculators may also be responsible for sending a once-obscure ETF tracking airlines soaring past $1 billion in assets, as day traders in lockdown defy Warren Buffett and pile into air travel companies.

With trillions of cash on the sidelines, the rally may have fresh legs. BNP Paribas analysts led by Greg Boutle for their part recommended call options on the S&P 500 in a note this week to guard against the risk of being left behind.

“We do see some right tail risks in an irrationally exuberant market,” they wrote in a note. “Given the net-short positioning we still see in CFTC data, the pain trade for markets could well still be higher.”